5. Forecast cash needs. A company's CEO or controller should be able to predict exactly how much cash the company will need -- and when -- to fulfill its payables obligations. That forecast then becomes an important tool in averting cash-flow problems. Managers should be able to tell if funds will be available at the right time from money-management accounts or bank credit lines. And if funds won't be available, you can take precautionary measures, such as stepping up the company's own bill-collecting efforts.
6. Keep good payables records. They should include weekly updates about the aging of every outstanding bill; documentation that matches each bill paid with its original sales order, delivery records, and payment invoice; and total cost records, including interest penalties paid on each bill. The last is important because, as James Greenfield, management consultant with The Wharton Resource Group, emphasizes, "most businesspeople don't realize how much it adds to their cost of doing business when they wind up having to pay interest charges to finance late payables."
7. Review payables records regularly. Payables reports are every bit as important as other cash-flow documents and need to be evaluated by all relevant personnel. (Depending upon a company's structure, that may include the CEO or controller, sales managers, and, if they exist, accounts-payable and accounts-receivable supervisors.) Generally speaking, you should review payables-aging schedules weekly; cost records can be evaluated monthly.
8. Recognize warnings signs. Since cash-flow cycles vary even in the best of times, there may be times when your payables get stretched without any long-term risk. But it's essential for someone in top management to keep an eye out for indications of more serious problems. (See "Warning Signs," next page.) One approach is to draw up a "payables problems" checklist, which breaks down average bill age, promptness of tax payments, any interest charges, and other warning factors you come up with for your company. To keep everyone informed, circulate the list each month to all managers, including your sales manager.
9. Fraud-proof the payables operation. "CEOs should never underestimate the importance of installing safeguards to prevent people within the organization from looting payables," says Paul Parish. "Fraud can be one of the most common problems growing companies encounter in their accounts-payable operations."
To minimize the risks, you should formalize payment procedures that should include double checks at each step of the process: bills should be paid only when they can be matched against purchase orders and delivery confirmations; one person should write or authorize checks while another signs them; computerized bill-payment systems should be ac-cessed only by computer code. If you rely on manual check-writing systems, keep blank checks under lock and key and track all numbers, including voided checks. If you make payments by wire transfer, establish bank procedures that ensure proper control over such transfers. "The best defense of all against fraud -- and it's one that an amazing number of smaller companies overlook -- is to make certain the checkbook balances each month," Parish advises.
WARNING SIGNS
Heading for accounts-payable problems? Here are five typical symptoms
* Aged payables: Most financial experts agree that companies are heading for trouble when their bills start becoming, on average, 45 to 60 days overdue. (The only exception: bills whose issuers have approved late-payment terms without interest penalties, in advance at order time.) "At 60 days, you've got to sit down and figure out which vendors you absolutely, positively must stay current with and start paying them anyway you can," emphasizes management consultant James Greenfield of The Wharton Resource Group.
* Interest penalties: Cash-savvy chief executives never box themselves in to paying interest charges on overdue bills -- unless they've already calculated clear financial benefits from using their funds elsewhere. Once you're paying penalties to even one or two vendors on a regular monthly basis, you're in trouble. Instead, you should approach your creditors about a workout plan that will reduce or perhaps eliminate hefty interest charges.
* Disorganization: "You know your whole system is heading for disaster when unpaid bills get thrown into someone's desk instead of entered into a record-keeping system that will keep aging bills so that management can track their payment," says CPA Ron Weiner of Weiner Associates. (For tips on software products that will correct this problem, see "Resources," page 3.)
* Overdue taxes: As Danny Sullivan of Village Shoes learned the hard way, skipping tax payments -- even with the best of intentions -- is a sure road to disaster. If your payroll, corporate federal, or state taxes are late, pay them immediately, even if it means keeping vendors waiting. If you dispute your tax bill, pay it anyway and then fight for a refund; that's the only way to eliminate the risk of costly penalties and interest charges.
* Hassles from creditors: If your only form of communication with vendors is being on the receiving end of hot-tempered telephone calls, chances are, you're suffering from problems of your own creation. Instead, "make it a habit to communicate informally with your creditors whenever you think a cash-flow crunch might be developing," urges Greenfield. "If you tell them, 'Yes, we've got a problem, we recognize it, here's what we think we can do about it, and we think we need your help,' it's pretty likely you'll get it."
